Volatile fuel pricing is a long-term issue. Why are we employing short-term solutions?
July 1, 2008
Going over my speaking notes while flying to Vancouver to host a half day session on the impact of fuel price volatility on road transportation, I couldn't ignore the strong sense of dj vu. That's b...
Going over my speaking notes while flying to Vancouver to host a half day session on the impact of fuel price volatility on road transportation, I couldn’t ignore the strong sense of dj vu. That’s because, I hosted a series of similar events across Canada just two years ago. The only differences were the organization I was working with (CITT this time rather Markel) and the makeup of the audience (more shippers rather than motor carriers).
The one constant between this event and the previous events two years ago, unfortunately, is that both motor carriers and shippers have not done enough to deal with the elephant in the room -the price of crude (up to $130 a barrel this time).
The main conclusion from our educational events two years ago stands true today: the only certainty about fuel pricing is continued uncertainty and volatility.
While motor carriers have taken the financially prudent step to protect themselves through fuel surcharges, and shippers have largely accepted their need to do so, I don’t think either side has gone far enough. Their actions -or lack of action may be more accurate -lead me to believe both sides continue to treat fuel pricing as if it is a temporary concern.
The reality of the past decade indicates it is anything but. Consider: we are now in our ninth year of what were supposed to be “temporary” surcharges for fuel costs; for the first time in the history of trucking, motor carrier diesel costs may be higher than their labor costs; in many cases we are seeing surcharges hitting the 40% range and with the price of crude forecasted by some analysts to climb to $200 a barrel within three years (that would mean diesel pricing between $2 and $2.50 a litre) they will only go higher; transportation budgets are off by millions of dollars because of fuel costs, necessitating cuts in other areas; our own research shows that close to half of Canadian shippers have already had to make changes to their modal options for at least some of their shipments in response.
Fuel surcharges have kept many a motor carrier from financial disaster, and shippers have benefited from the stable capacity this has created. The last time motor carriers got caught with sharp fuel price spikes and no fuel surcharges in place, at the end of the last decade, a good quarter of Canada’s small motor carriers disappeared.
But in the end fuel surcharges were devised as a short-term solution and as such are likely not the best answer to what has turned out to be a long-term problem.
To be fair, forward-thinking motor carriers have taken steps to improve their fuel efficiency through training, investing in fuel saving equipment and pushing for speed limiter legislation to ensure all trucks conserve fuel by being made incapable of excessive speeding.
There are many good ways shippers can help their carriers further reduce their fuel costs through improved efficiencies, such as better routing and optimizing the size of shipments.
But although all those strategies certainly help in dulling the pain of skyrocketing fuel pricing they can not remove it, nor can they guard against the volatility of it. That requires a different strategy -one that is strangely absent in my view in the motor carrier industry. I’m referring to a financial strategy that protects both carriers and their customers against diesel price volatility. That strategy -a fuel hedging solution called a call option -has been used successfully for decades by other industries.
A call option caps fuel prices over a set period of time -say, six months or a year. Motor carriers enrolled in such an option pay a protection fee and get reimbursed if prices rise above the cap. If prices drop below the cap, they don’t get their protection fee back but they do get the benefit of the lower fuel prices -they’re not locked in to buying fuel at the capped rate.
Considering carriers could pass on the cost of the protection fee to shippers and give them the peace of mind gained through stable pricing, it’s beyond my understanding why this strategy has not caught on in the motor carrier industry.
How many more years of volatile fuel pricing and rising fuel surcharges need go by?
“It’s not policy that will eventually humble the carbon economy. It’s the price of oil.”
-Carl Mortished, The UK Times
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